Nutex Company operates as a decentralized organization. Its chips division is an investment centre and the divisional manager, Ms. Chaudry, is free to invest in any project that adds value to Nutex. The chips division’s total assets are $3,500,000 and current liabilities are $700,000. The chips division is one of the best performers in the company and its return on investment is 20%. The chips divi-sion’s capital structure is 50% debt at a cost of 10%, and 50% equity with a cost of 14%. 

Ms. Chaudry is considering purchasing new equipment for $860,000. Its anticipated seven-year life will generate additional revenue of $320,000 and operating expenses, excluding amortization, of $115,000 annually. The straight-line amortization method will be used. At the end of seven years it will have a salvage value of $20,000. Nutex’s tax rate is 40%.

Required:

A. What is the net present value of the investment, using the WACC as the discount rate? 

B. What is the point of indifference in terms of the incremental cash flow for the investment? 

C. What is the payback period? 

D. What is the EVA for the current financial state of the chips division without the new investment?

E. Assume the chips division will finance the investment with the same cost structure and the same costs. What are the chips division’s ROI and EVA for the investment? 

F. Comparing the chips division’s ROI and EVA before and after the investment, should Ms. Chaudry proceed with the investment project, if her performance evaluation is based on these two fi nancial measures?